Palermo Viejo, Buenos Aires, Argentina

Richard Russell: Why this is a bear market correction… That latest outbreak of investor credulity… 25 biggest earnings-per-share movers and shakers heading into earnings season… Banks to be allowed to screw up indefinitely… The great “too big to fail” fraud… Bailouts costing $42,105 for each U.S. citizen… Bush-Obama tag team piles on debt at the rate of $60,000 a second… Bob Higgs on C-SPAN… China wises up… And more!

*** This Richard Russell quote is a must-read for investors thinking about buying back into stocks. Russell, now in his 50th year of publishing the excellent Dow Theory Letter, believes we are now witnessing a bear market correction.

The essence of Dow Theory has to do with VALUES. At the March low the price/earnings ratio for the Dow was 25.79 and the dividend yield for the Dow was 3.99%. For the S&P 500 the P/E was 28.38 while the dividend yield was 2.98%. Consider the following — this bear market has, so far, qualified as a MAJOR bear market. Stock values, across the board, are down 50%. Most major bear markets in history have taken stocks down to the point where price/earnings for both the Dow and the S&P are below 7, while at the same time dividend yields are at 6% or higher.

I would expect this bear market, regardless of intervening rallies, to end with stocks selling at “great values,” meaning P/E ratios well below 10 and dividend yields in the 5-6% area. We’ve seen nothing like that so far. All of which makes me believe that we are now simply in a bear market correction.

(Hat tip, The Daily Crux.)

*** It’s no secret that here at Notes we think the stock market rally will fall off a cliff. Too much of the turn-around news, such as the first quarter bank earnings, is just too suspicious to be fully believed. And when the bottom does fall out of the market again, you want to be properly positioned to profit.

My friend Martin Weiss has a way of doing just that using put options. You can buy put options on many endangered stocks for as little as $50 or $100 each. And because they’re not futures, they strictly limit your risk and offer virtually unlimited profit potential.

Here is how some of his put options performed as stocks plunged in 2008:

* On February 6, you could have bought 10 put options on Centex Corp stock for just $95 each – $950 in all – and sold them 27 days later for $4,800 — a 405% gain.

* You could have bought 10 put options on MGM Mirage on September 22 for just $1,350 – and sold them 161 days later for $17,000 – a 1,159% gain in just a little over five months.

* You could have bought 10 puts on MDC Holdings on September 15, for just $540 – and cashed out 67 days later for $4,100 – a 659.26% gain. That’s enough to turn $5,400 into $41,000 in just a little over two months.

To learn more, follow this link.

*** But the Wells Fargo pre-announced Q1 profits mean the banking crisis is over and the bottom is in for stocks… right? Perhaps. But investors have short memories, says Jack McHugh at the Big Picture.

Remember all the bank executives who said in June of 2007 that “the problems are in subprime and they are contained”? The problem soon grew worse, but it didn’t stop these same executives from making similar claims in October of the same year. Gullible investors believed these claims enough to push both the Dow and S&P 500 to new record highs during that same month. After Bear Stearns was forced into the waiting arms of JP Morgan in March of 2008, a chorus of “the worst of the financial crisis is now behind us” went up that spring among the head honchos at these same firms. Citing the tremendous values the battered shares of their firms represented, bank executives used the resulting bear market rally to raise capital. When Fannie and Freddie hit the reef in the summer of 2008, we were once again treated to “the worst is over” song. Then Lehman went under and the music stopped.

Now that the banks have received their wish in the form of relaxed mark-to-market accounting rules, we are hearing it all again. Wells Fargo is merely the vehicle for this latest outbreak of investor credulity, but now even the analysts not named Mike Mayo or Meredith Whitney are sounding the alarm about WFC’s true capital needs. Since most of these firms will, like Goldman Sachs, try to raise capital now that their stocks are rallying, please remember what these firms do best — sell. Many times during the great financial crisis of 2007-2009 the banks have spun tales that would make “Professor” Harold Hill blush in order to raise the funds they needed to stay in business. And each time has turned out to be a less than opportune time to buy stocks.

Be advised. There’s a lot more than meets the eye when it comes to banks’ miracle profits.

*** Back in the real world, “disappointing” retails sales have sent stocks lower in the early going. That the 1.1% drop in March sales should be disappointing shows how out-of-whack the market is right now. Realists would expect such a drop, given the economic headwinds. Hasn’t America lost more than 5 million jobs since the economic crisis began? Isn’t it kind of obvious that people without jobs spend less?

*** Here at Notes we reckon that earnings season will hold some nasty surprises for those drinking the Washington/Wall Street Kool-Aid. Bespoke Investment Group has put together a list of the 25 biggest movers and shakers in the S&P 1500 in terms of earnings-per-share estimates.

*** Banks are still rotten to their core, says Taipan Daily editor Justice Litle.

I think America’s banks are still rotten to the core. I think the measures that have been taken by Washington, initiated under Bush and continued by Obama – a pox on both their houses – are even more rotten still.

I further find it more than telling that Tim Geithner is a signed-and-sealed product of Wall Street (bought and paid for by the banks he once worked for)… that top economic adviser Larry Summers has received literally millions upon millions in speaking fees and consultation fees from the very fat cats who caused all these problems… and worst of all that Paul Volcker, one of the few plain-spoken and honest men left in Washington, has reportedly not even been able to get an audience with President Obama for over a month. (The mind boggles. Did I say that already? Let me say it again…)

The hidden trading implication here is that this mega-rally in the financials could be one big giant “gotcha.” The government’s attempt to juice the fortunes of hopelessly compromised and corrupt institutions via the channeling of hundreds of billions worth of taxpayer funds – some of it legally appropriated and some of it flat-out looted – could still fail spectacularly.

We love Justice here at Notes. Maybe it’s because he makes us feel less alone in calling the current rally in financials a sham. Maybe it’s just because he’s full of great ideas. Justice says, “Good news from the banks should be taken with not just a grain of salt, but half a ton of salt at this point, given their ability to play coy with their balance sheets and use the government’s tens of billions worth of bailout largesse as perfume to cover the stench of still-rotting toxic garbage.” Amen, brother.

*** The bailout tally so far: $12.8 trillion promised to stabilize the banking system and revive economic growth. That figure amounts to $42,105 for every man, woman and child in the country. That’s $128,000 for each one of America’s 100 million families. Suck it up. You’ve got no choice.

*** $60,000. That’s how much the feds are going into debt… every second . According to Addison Wiggin and Ian Mathias in yesterday’s 5 Min. Forecast:

George W. Bush, Barack Obama, their administrations and Congress have teamed up for what was truly the most bipartisan effort we can recall – six straight months of budget shortfalls to total a record $956.8 billion.

*** At this rate, Team Obama better hope the Chinese still have a hearty appetite for U.S. debt. Unfortunately, those wily commies seem to be cottoning on to the harsh new realities presenting themselves back in the US of A. (The government over there may be a ruthless communist dictatorship with no concern for human freedoms, but it knows what’s what when it comes to investment returns.) This again from  “the 5”:

During the first quarter of 2008, the Chinese bank bought $153 billion in FX reserves – more than 21 times what they’ve bought over the last three months. It’s fairly safe to say the Chinese are losing their taste for the dollar. How long before they sour on “toxic” Treasuries?

Here’s a clue: Uncle Sam’s go-to banker sold more U.S. debt in the first two months of 2009 than they bought. In March, they about-faced and bought it all back… presumably once bond yields returned to less ridiculous levels.

But even a slowdown in purchase of Treasuries from Beijing puts the whole Obama bailout-stimulus strategy on thin ice.

And it won’t be long before the skaters start plunging into the icy waters below.

*** If you didn’t get a chance to already, check out this C-SPAN2 interview with economic historian Bob Higgs.

The interview covers the bailouts, Keynesianism, Austrianism, war, the military-industrial complex, corporatism, regulation, free trade, the FDA, the Fed, the New Deal, unfunded liabilities, the war on terror and how the government grows and tramples individual liberty during times of crisis.

One of the points Higgs makes very forcibly is that the government’s mantra that banks are “too big to fail” is bordering on a fraud. He says there’s precious little evidence to support this claim and that the bogeyman of systematic risk has been blown out of proportion to sanction the socialization of banks’ losses.

Besides, if “too big to fail” is a problem, as many in government say it is, then why did it facilitate last September’s spree of bank takeovers, making already-too-big even bigger? This is precisely the opposite of what NYU economics professor Nouriel Roubini advises. “The institutions are insolvent,” Roubini told Bloomberg Radio recently. “You have to take them over and you have to split them up into three or four national banks, rather than having a humongous monster that is too big to fail.”

*** One thing is clear: government will not let zombie banks fail. And that means it will tax, print and borrow whatever it takes to prop up these failed institutions. As Dave Gonigam points out at the Daily Reckoning , Geithner reaffirmed this in the recent Charlie Rose interview. Asked about the possibility of letting a major bank fail, he said:

“I’ll say again, they play a critical role in our markets, in our financial system. We want to continue to make sure they play that role. Now, where they need temporary assistance through the government to get through that, we’re going to make sure it comes with appropriately tough conditions so that they emerge stronger and that we’re providing a level of conditions and accountability that’s appropriate in this context.”

Translation: They can continue screwing up indefinitely, and we’ll still come to their rescue.

*** One thing the government’s game of print, borrow and tax virtually guarantees is higher commodities prices driven by future inflation. We don’t know of a better source of advice when it comes to hard assets than Casey Research. And one strategy stands out head and shoulders above all the others. It’s called the “Riptide Strategy,” and over the past 40 years it could have made you a return of 455,874%. To find out what these “riptides” are, read on here.

*** From the mailbag…

** Will ..specifically…  What/Which   and at what cost…  advise services DO U OFFER??? Between UUU & ur father I believe I see more than a dozen possibilities…CORRECT OR ??????????

Notes comment: Normally, we don’t answer illiterate emails or ones that are unsigned. But you raise an important point I am the publisher of two websites: ContrarianProfits.com, a free online resource of contrarian money-making ideas, and LatinForme.com a free Spanish-language investment resource that covers Latin American markets. I also publish Notes from the Investment Underground , another free resource of money-making ideas and market intelligence, and Abundance, a free weekly newsletter about how Americans can better cope with the financial pressures of the “Great Recession.” My dad, Bill Bonner, publishes the Daily Reckoning, a free financial newsletter that is celebrating its tenth year in existence this year. These are all 100% free to read.

What isn’t free to read is Crisis Strategy Alert, a unique crisis investing research service I publish. CSA is edited by one of the best crisis investors living today, James Dale Davidson. James has been warning about he calls the “Great Wipeout” for years, mainly through his bestselling books, Blood in the Streets and The Great Reckoning: How to Protect Yourself in the Coming Depression. CSA isn’t for everybody.

Most people refuse to accept that the recent crash and the massive deleveraging process that followed have changed the investing rule book… possibly forever. They continue to cling to outdated ideas and miss the incredible opportunities to profit that a crisis like this produces. James calls these opportunities “investment outliers” – pricing anomalies created by widespread panic across different asset classes. Put simply: these are one-off ways of buying dollar bills for 50 cents.

At CSA, we believe that great investors adapt to the times. Right now, that means falling asset prices, encroaching regulation and collapsing credit structures. We also believe right now is the opportunity of a lifetime to make money… lots of it. For more information on becoming a member, follow this link.

** Hello folks, Your newsletter and articles of interest concerning Argentina have peaked my interest in, at the very least, of visiting with the possibility of relocating. I would be interested in any and all information via the web that you may recommend. Although I am a blue collar worker I am disgusted with what I am watching unfold with the leadership of the US. I am grateful for the information that you bring to light with your newsletter. Keep up the good work.

– Greg C

Notes comment: Thanks, Greg. We’re glad you’re enjoying Notes . Argentina is certainly a great country. And it’s as far away as you can get from the ongoing political calamity in the U.S. This link from International Living is a pretty good introduction to living down here. As the page says, “Argentina is like Europe… but at one-fifth the price.”

*** Quote of the day : “Advice to the pirates: Call your ransom demands ‘taxes.’ Give yourself titles like ‘President,’ ‘Admiral,’ and ‘Congressman.’” Lew Rockwell, head of the Ludwig von Mises Institute.

Until tomorrow,

Will Bonner

Must reads:

• Investors have short memories (or why you shouldn’t trust a word bankers say) ( The Big Picture )
• Charlie Rose interview with Geithner [video] ( YouTube )
• Richard Russell on why you should worry about the rally in stocks ( The Daily Crux )
• Why banks are still rotten to the core ( Taipan Daily )
• Roubini says bank takeovers deepened financial crisis ( Bloomberg )
• Chinese property prices likely to halve over next two years ( FT )
• Geinther’s “stress tests” not so stressful: actual macro data already worse than the most adverse scenario for 2009 ( RGE )
• Oil: the coming supply crunch ( ChrisMartenson.com )
• Goldman Sachs earnings transcript ( Zero Hedge )
• Yee-haw! Texas governor banks resolution backing states’ sovereignty ( Drudge Report )

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